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COGNIZANTJANUARY 2017
ENDURING QUALITY | VISA CASHING IN ON A CASHLESS SOCIETY | SPAR GOOD FOR YOU | THE ECONOMY IN 2017 IN SEARCH OF SILVER LININGS | THE QUALITY OF LIFE
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COVER IMAGE – FABERGÉ EGGSFounded in 1842, the House of Fabergé was commissioned by the Russian royal family to create jewel-encrusted eggs for Russian Tsars as a gift for their wives. Known for their intricate detail, impeccable quality and unbridled beauty, the imperial eggs took a year or more to make and involved a team of highly skilled craftsmen. Today, the House of Fabergé produces a range of quality jewellery and timepieces that cater for the elite.
TABLEOF
CONTENTS
INTRODUCTION 3
ENDURING QUALITY 4
VISA CASHING IN ON A CASHLESS SOCIETY 10
SPAR GOOD FOR YOU 15
THE ECONOMY IN 2017 IN SEARCH OF SILVER LININGS 19
THE QUALITY OF LIFE 23
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INTRODUCTION CHRIS POTGIETER – HEAD OF PRIVATE CLIENT SECURITIES
What a tumultuous year 2016 has
been! The surprises ranged from
unpleasant to pleasant and mostly left us
asking “what next”? In South Africa, we
faced a troubling start to the year and
an uncertain future path, but as the year
progressed we slowly came to terms
with the factors that led to our collective
confidence collapsing at the start of the
year. All three ratings agencies gave SA
the benefit of the doubt and our investment
grade status was maintained – a rarity
among commodity-exporting emerging
market countries. On the global front, the
big surprises included the results of the
Brexit vote and the divisive US presidential
election. Another (positive) surprise was
the resilience of markets in the face these
events. Despite short-term volatility, markets
mostly recovered to their long-term trends
– even in the global fixed income market
tentative interest rate normalisation can
be seen. It is during these (often brief)
times when negative sentiment weighs
on markets that investors have the best
opportunity to acquire quality companies
at a better price.
As we enter 2017, what can we expect?
While none of us have the proverbial
crystal ball at our disposal, it does appear
fairly certain that the world is moving from
monetary stimulus to fiscal stimulus and that
this shift will be led by the US. The market
is expecting the Trump administration to
spend up to US$1 trillion repairing and
building the US infrastructure, which
should boost the real economy in a
way monetary stimulus could not. If this
happens, it should benefit equity and
commodity markets and lead to a gradual
normalisation of interest rates. Locally,
stable politics coupled with a strong rand
will help SA navigate the risks that the
global economy still presents. On the risk
side, the world faces the demise of old
orders and alliances – both politically and
economically. New orders and alliances
still need to be tested and that will take
many years. These developments could
be good or bad depending on where
you stand. It is in such an environment
where one would want to be invested
in quality companies.
In our feature piece, we unpack what
“quality” means and why it should be
considered, together with valuation, as
the bedrock for long-term investments.
We then look at two companies from our
model portfolios – one local (Spar) and
one global (Visa) – to explain in practical
terms how a quality-focused investment
philosophy plays out. We have invited
economist Roelof Botha to give us insights
into the local economy and an overview
of the economic outlook for the year
ahead within the global context. The title
of the article does give something away:
“The economy in 2017 – in search of
silver linings”.
So, we are still facing many uncertainties
in the markets over the next year. But there
will also be many excellent investment
opportunities. Herein the words of John
F. Kennedy ring true: “The Chinese use
two brush strokes to write the word 'crisis'.
One brush stroke stands for danger;
the other for opportunity. In a crisis, be
aware of the danger – but recognise the
opportunity.”
Wishing you a prosperous 2017!
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ENDURING QUALITYSAMEER SINGH – RESEARCH ANALYST
“Quality is never an accident; it is always the result of high intention, sincere effort, intelligent direction and skilful execution; it
represents the wise choice of many alternatives.” – William A. Foster
Most investors know about the traditional Value and Growth investment strategies. However, "Quality" as an investment strategy
has been gaining traction due to its success in adding long-term value in the context of increasingly volatile and uncertain markets.
Quality investing is based on a deep understanding of the factors that influence a company’s performance over the longer term.
However, quality means different things to different people and unlike other investment strategies such as Value and Growth, there
is no universally agreed upon definition of Quality.
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RESEARCH AND QUALITY
FACTORS
Putting aside the lack of consensus, decades
of research provide us with a notable body
of knowledge to draw from. Interestingly, it
was the father of Value Investing, Benjamin
Graham, who in 1949 introduced the
importance of recognising the quality
of a business in addition to the price
(valuation) being paid for it. In Graham’s
seminal work, The Intelligent Investor1, he
highlights that an investor should “apply
a set of standards to each purchase, to
make sure that he obtains a minimum of
quality in the past performance and current
financial position of the company, and
also a minimum of quantity in terms of
earnings and assets per dollar of price”. He
further outlines seven quality and quantity
criteria by which purchases should be
evaluated. These include: adequate size
of enterprise; strong financial position;
earnings stability; dividend record; earnings
growth; moderate price to earnings ratio;
and moderate price to book ratio.
The strong focus on earnings in the criteria
emphasises the importance Graham placed
on profitability. This emphasis is a common
thread through academic literature on
this topic. Examples include Fama and
French, who chose equity income to book
value, and Dimensional Fund Advisors'
direct profitability ratio2. One of the most
influential proponents of quality investing
has been Jeremy Grantham of GMO3.
He defines a quality company as one
that has high profitability, low leverage
and low earnings volatility.
Another recently popularised ratio is return
on invested capital (ROIC), espoused
by investor and Columbia Business
School Professor Joel Greenblatt4. ROIC
is often seen as a quantitative measure
of profitability and management’s skill.
Greenblatt also suggests combining ROIC
with free cash flow yield. This is used to
introduce an element of valuation into the
screening process.
Other practitioners and academics have
extended beyond a single quality measure,
opting rather for multi-metric definitions. The
F-score, developed by Joseph Piotroski5,
uses nine metrics, while the MSCI and S&P
indices also maintain investable quality
indices and rankings.
Looking through the historical context, we
are reminded that quality investing at its
core is a defensive investment strategy
– one that aims to limit volatility (risk
of capital loss) through predictability
(earnings growth track record) and
stability (strong financial position and
stewardship). The combination of the
above is that quality companies are
less affected by negative market and
economic cycles. This is what makes a
quality investment strategy attractive to a
long-term investor.
HOW WE DEFINE QUALITY
We believe the mainstream value and
growth investment styles have inherent
deficiencies. Value managers are often
ENDURING QUALITY
TABLE 1: SNAPSHOT OF QUALITY MEASURES
QUALITY DEFINITION CRITERIA
Benjamin Graham • Adequate size of enterprise • Strong financial position • Earnings stability • Dividend record • Earnings growth • Moderate price to earnings ratio • Moderate price to book ratio
Fama and French • Equity income/book value
Dimensional Fund Advisors' Direct Profitability
• Operating income before depreciation and amortisation less interest expense scaled by book value
Jeremy Grantham – GMO • Low leverage • High profitability • Low earnings volatility
Joel Greenblatt • Return on invested capital • Free cash flow yield
Piotroski F-Score • Return on assets • Net income • Operating cash flow • Leverage • Liquidity • Issuance • Gross margins• Asset turnover • Stability of earnings
MSCI Quality Indices • Return on equity • Debt to equity • Earnings volatility
S&P Quality Rankings • Using earnings per share and dividends over the last 10 years. A score is created based on changes in the growth profile, stability with long-term trends and cyclicality
1 Graham, Benjamin. 1973. "The Intelligent Investor" (4th Rev. ed.). Harpers & Row, New York, New York.2 Robert Novy-Marx, “Quality Investing” (2014)3 GMO. 2004. “The Case for Quality–The Danger of Junk.” GMO White Paper.4 Greenblatt, Joel. 2010. “The Little Book That Still Beats the Market.” John Wiley & Sons, Hoboken, New Jersey.5 Piotroski, Joseph D. 2000. “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers.” Chicago GSB, Selected Paper 84
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classed as contrarians, purchasing stocks
that they believe are trading below their
intrinsic/net asset values. Sometimes,
this is done in the face of falling share
prices. This results in "lumpy alpha" or
outperformance being concentrated in
short periods of recoveries in those stocks.
The problem with this strategy is that it
is difficult to pinpoint when sentiment
shifts and negative market momentum
turns positive, resulting in the potential
of holding ever-cheapening stocks (i.e.
catching a falling knife). Growth managers,
on the other hand, seek out strong share
price and earnings momentum resulting
in periods of excess returns. However,
these returns may come under pressure
over the longer term as trends reverse.
At PCS we build resilient portfolios, with the
objective of generating attractive long-term
returns while minimising risk. We do this
by combining a top-down methodology
with bottom-up stock selection. Top-down
analysis is long term and secular in nature,
incorporating analysis of economies
and markets. We use these findings to
highlight themes that then warrant research
into particular industries and sectors for
attractive stock selection opportunities.
Our bottom-up selection focuses on strong
fundamentals combined with quality
characteristics.
We seek companies with high returns
on invested capital, strong free cash
flow generation, operating margin
expansion (increasing profitability),
long-term earnings and dividend growth
prospects, balance sheet and financial
strength, exemplary management
quality, an economic MOAT and
reasonable valuations. The value of
a good quality management team must
not be underestimated, as they have the
ability to enhance a company’s brand
and reputation, protect it against risks,
increase its efficiency and boost its profits
and position.
THE IMPORTANCE OF
VALUATION
Going back to Graham, valuation pays
an important role in quality’s attractiveness
as an investment strategy. Arguably the
most successful investor of all time, Warren
Buffett, stated that, “It’s far better to buy a
wonderful company at a fair price than a
fair company at a wonderful price.” While
there are historic analyses that show quality
investment strategies deliver favourable
performance over time, there are also
studies that demonstrate the investment
returns generated by quality are actually
quite small. However, when quality is
combined with value, investment returns
improve substantially.
A study released recently by MFS
Investment Management6 showed that
investing in a portfolio of inexpensive stocks
(low valuation) would have outperformed
investing in high quality stocks by a small
amount. However, when investing in
a portfolio of stocks that are both
high quality and inexpensive, the
investor would have outperformed the
market by almost 5% per year over the
38-year analysis period. In addition,
the study found the level of persistency
of returns to be greater in the high quality
group of stocks.
TABLE 2: THE PCS QUALITY METRICS
METRIC MEASUREMENT
Return on Invested Capital Assesses a company's efficiency at allocating the capital under its control (equity and debt) to profitable investments
Free Cash Flow Yield Gauges a company's ability to generate cash and essentially self-finance. Also used as a valuation metric similar to a dividend yield
Operating Margin Indicator of profitability of a company, measuring how much earnings are generated per dollar of sales
Balance Sheet Strength Multiple measurements including solvency ratio, activity ratio, degree of leverage and capital structure – measures a company’s resilience to downturns
MOAT Measures a company's ability to maintain competitive advantages over its competitors in order to protect long-term profits and market share from competing companies
Management Management depth and experience, a solid track record of delivering on key metrics and clear articulation of future strategy and targeted results
6 “Quality and Value; The Essence of Long-Term Equity Returns”; MFS Investments; White Paper Series, June 2015
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ENDURING QUALITY
CONSTRUCTING QUALITY
PORTFOLIOS
We build concentrated portfolios of quality
companies, aiming to own between
20 and 25 companies at any given
time. It is not enough to simply identify
a quality company. Investors need to be
discerning as to the price paid, as this
sets the base for future returns. Some have
argued that quality stocks always trade
at a premium to the market. While some
quality companies do generally trade at a
higher value than the market, we believe
there is enough opportunity to find quality
companies at an opportune price through
active portfolio management. This same
approach is needed to determine when
to sell a quality company. We mitigate
the risk of holding only “expensive”
quality companies by applying a portfolio
approach to quality stock selection.
This is achieved by splitting investments
into groupings of stalwarts and growth
opportunities (future stalwarts). Stalwarts
are companies with long-term track records
of profitability, low leverage, sound
financial and business management and
established, strong market positioning.
Examples of these are Visa, Johnson &
Johnson and Nestlé. Growth opportunities
are companies that we believe are on
their way to becoming great. Some
examples of these are Starbucks, Nike
and Alphabet (Google). Maintaining a
mix contributes to portfolio diversification
(risk mitigation) and provides a “value
unlock” element as good companies
rerate to great companies, and this is
reflected in share price appreciation.
REAPING THE REWARDS
At PCS, we manage a range of model
portfolios and consistently apply our
quality investment process across these
portfolios. These portfolios are used as
reference points to implement our clients’
investment strategies, which are tailored
to their particular investment objectives.
For example, our Equity Income Model
Portfolio is primarily focused on providing
stable income streams, so our process is
geared towards identifying companies
that have shown an ability and willingness
to consistently return cash to shareholders
through meaningful dividend payments.
Our flagship Core Equity Model Portfolio,
on the other hand, blends a mix of growth-
oriented quality companies with mature
stalwarts with high revenue and earnings
bases that return cash to shareholders via
dividends and stock buybacks.
It is important to emphasise that reaping
the rewards of quality investing requires
patience and perseverance. Ultimately,
we believe that owning high quality
businesses over the long term is the best
route to achieving outstanding investment
returns. In the words of author Leo Tolstoy,
“The two most powerful warriors are
patience and time.”
Considering our clients’ goals of long-term
wealth creation, we believe investing in
quality companies that endure over time
presents a good fit. From an academic
point of view, there have been numerous
studies showcasing quality’s merits as an
investment strategy. Two of the world’s
largest index providers, MSCI and S&P, produce investable quality indices and rankings allowing for meaningful comparisons to market returns.
According to MSCI, quality growth companies are characterised as companies with durable business models
QUALITY BEYOND THE RATIOS
and sustainable competitive advantages. Companies that tend to have high return on equity (ROE), stable earnings that are uncorrelated with the broad business cycle, and strong balance sheets with low financial leverage, are targeted for
quality growth.
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MSCI use their three factors (ROE, stable
earnings growth and debt to equity ratio)
to create quality indices, including the
MSCI World Quality Index1.
MSCI highlight that their factor indices are
highly cyclical. So while the MSCI World
Quality Index has outperformed the generic
World Index over the long term, there are
sub-periods where investing in the quality
factors result in relative underperformance.
The difficulty for investors is to resist
capitulating during these periods of relative
underperformance. In a recently published
edition of their Research Insights, MSCI
conducted a bi-variable analysis of the
MSCI World Quality Index, the MSCI
World Index and MSCI’s World Sector
Indices. Their findings are presented in
the table below:
It is during periods of slowing growth
that quality factors display the strongest
relative performance, further validating
quality as a defensive investment strategy.
S&P rate companies on quality metrics
with a focus on earnings and dividend
criteria. In “The Case for Quality”2,
Gevorgyan and Orr conduct holdings-
based analysis using components of the
Russell 3000 Index. They split the index
according to the S&P Quality Rankings,
A-, B-, C-rated and unrated companies.
From their analyses, there are some
noteworthy highlights:
• There are fewer A-rated financial
companies – most of them are
C-rated. This could be owing to
leveraged balance sheets and
inconsistent earnings. The few that
were A-rated encompass large
insurers and firms with fee-oriented
business models.
• Consumer staples feature prominently
among A-rated companies. These
businesses typically enjoy stable
demand for their products, which
leads to more consistent earnings.
• Healthcare companies feature across
both A- and C-rated companies. The
larger pharmaceuticals, medical
device and care companies comprise the majority of high quality healthcare
companies. As with staples, these
larger firms maintain relatively stable
demand for their products and
services. This is in contrast to lower
quality healthcare companies, which
mainly contain small biotechnology
companies where economic success
is usually linked to one or a few
products which may still be in trial
or development phases.
Typically, the above companies are large
capitalisation businesses. These findings
inform the holdings within our Global
Equity Model Portfolio, which has a
preference for quality companies with
stable earnings, strong balance sheets
and competitive market positioning.
This portfolio maintains an overweight
exposure to the information technology,
consumer discretionary and consumer
staples sectors.
Source: Market Vectors, Gupta et al, 2014
ECONOMIC CONDITIONS
QUALITY FACTORPERFORMANCE SECTOR COMMENTS
Rising Inflation/Rising Growth
Moderate outperformance
IT sector outperforming, financials and telecommunications underperform
Falling Inflation/Rising Growth
Moderate underperformance
Energy and materials outperform, healthcare and consumer sectors underperform
Falling Inflation/Slowing Growth
Strong outperformance
Healthcare and consumer staples outperform, materials, energy and industrials underperform
Rising Inflation/Slowing Growth
Strong outperformance
Healthcare, energy and consumer staples outperform, consumer discretionary and materials underperform
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MSCI World QualityMSCI World
CHART 1: CUMULATIVE INDEX PERFORMANCE
1 Gupta, Abhishek, Altaf Kassam, Raghu Surtanarayanan, Katalin Varga. 2014. “Index Performance in Changing Economic Environments.” MSCI Research Insight2 Arman Gevorgyan and Amy Orr. "The Case for Quality."
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EVOLUTION OF THE ELECTRONIC
PAYMENTS INDUSTRY
Despite cash still being king, the
electronic payments industry has evolved
rapidly over the last two decades. The
trends in both emerging and developed
markets are well entrenched. Within
emerging economies, mobile payments
have been the main beneficiary. With
formal banking in emerging markets
reaching only 40% of the population
compared to 90% mobile phone
penetration, the preference for mobile
payment technologies has been driven
by the high percentage of an "unbanked"
population and the high usage of mobile
devices. The relatively low cost of
mobile money infrastructure (no ATMs or
point-of-sale terminals are required) has
endeared the technology to emerging
market consumers.
VISA − CASHING IN ON A CASHLESS SOCIETY
VICTOR MUPUNGA – RESEARCH ANALYST
Former IMF chief economist, Dr Kenneth Rogoff, recently published his latest book titled "The Curse of Cash". In the book, Dr Rogoff
argues that society would be better off phasing out paper money as it is making us "poorer and less safe". His contention centres
on his findings that the primary users of large denominations (and sums) of cash are tax evaders, terrorists, human traffickers and
generally the underground economy (the recent, drastic move to demonetise the 500 and 1 000 rupee notes in India is a case in
point). An additional argument put forward is that part of central banks’ policy arsenal, specifically negative interest rates, would
be more effective if there was no paper money for individuals to hoard.
From his arguments, it is clear that we are fast approaching a time in economic history where terms such as "a cashless society" will
not be idealistic expressions used by futurists, but rather a reality that defines how we transact daily. However, until we reach that
point, cash remains the most widely used payment method. In the US, it is estimated that over US$1.4 trillion in cash is currently in
circulation. This is not unique to the US, as over US$3 trillion of Europe’s personal consumption is still transacted with cash and cheques.
Within developed markets and largely
banked countries, like South Africa, the
most reliable and secure payment solution
remains the bank card. According to BNP
Paribas, payment cards are the leading
non-cash instruments used globally and
increased by 12% over the past year.
Factors that contributed to the growth
in card use include enhancements to
the card, such as contactless cards
and superior security features. Outside
of the aforementioned technologies,
the likes of PayPal, an online payment
platform, and even virtual currencies
(Bitcoin) have all emerged as contenders
to replacing cash.
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Mill
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Cheque Credit Transfer Direct Debit
Credit Card Debit Card
CHART 1: GLOBAL NON-CASH TRANSACTION VOLUMES
Source: Celent
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85.0
57.8
32.8 26.7
8.51.5
163.6
101.390.7
64.0
22.3
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Mill
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2012 2016
CHART 2: MOBILE PAYMENT USERS BY REGION
Source: Statista
VISA – CASHING IN ON A CASHLESS SOCIETY
VISA – OUR FAVOURED
EXPOSURE
Our preferred exposure to this dynamic
and fast-growing sector is through Visa Inc.,
the global leader in payment technology.
Despite the proliferation of alternative
payment systems, we believe that the
incumbents (Visa and Mastercard) retain
strong positions primarily due to the
arduous barriers to entry, network effect
of their operating models and brand equity that draws users to their offering.
Visa’s dominant market position can easily be confirmed by the evidence that about 50% of all the credit cards around the world are Visa-branded. Furthermore, around 70% of all global debit cards are Visas. Despite this and the fact that consumers interact with Visa’s offering numerous times a day, Visa does not regard the consumer as its client. Instead, Visa’s client relationship is with the banks that issue Visa-branded credit or debit cards to consumers. Essentially, Visa’s offering is the network or technology that connects a consumer, a merchant, the consumer’s bank and the merchant’s bank.
CHART 3: PROCESSING STEPS INVOLVED IN A TYPICAL TRANSACTION ON VISA’S NETWORK, VISANET
Source: Company reports
AUTHORISATIONAuthorisation request messages are switched
between acquirers and issuers.
DAILY CLEARING & SETTLEMENTClearing files sent from acquirers are processed for final settlement between issuers and acquirers.
FRAUD AND RISK MANAGEMENTReal-time transaction monitoring, alerts and
encryption.
VALUE-ADDED SERVICESAccount level processing, loyalty, commercial reports and dispute resolution.
NETWORK PROCESSING
ACQUIRER PROCESSORISSUER PROCESSOR
ISSUERACQUIRER
MERCHANT ACCOUNT HOLDER
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THE VISA TRANSACTION
CYCLE
A typical transaction begins when a
consumer presents a Visa-branded
card to a merchant for payment. The
transaction information is conveyed
through VisaNet to the merchant’s bank
(acquirer) and then to the consumer’s
bank (issuer) for authorisation. Once
authorised, a clearing file containing
the final transaction data is submitted to
the acquirer and is processed for final
settlement. All these stages, with the
exception of the settlement which usually
happens at the end of the day, occur in
a matter of seconds. In exchange for the
use of its network for authorising, settling
and other value-added services, Visa
earns a fee from the merchant.
The gatekeepers to the payment network
are the issuing banks, who ultimately
decide which card (Visa or Mastercard)
to issue to their clients. Visa, along with
its major competitors, pay about 20%
of their gross revenues as incentives for
banks to issue their cards and thereby
use their network. The incentives paid
by payment networks to banks are the
primary source of funds for banks’ loyalty
programmes. This symbiotic relationship
between the banks, consumers and the
payment networks is one reason why
the barriers to entry are so high – each
additional user of the Visa network
increases the value to others. From a
merchant’s point of view, they want the
assurance that they will receive the funds
in their account and that they can trust the
card that the customer uses in their store.
This explains why merchants will only
accept certain branded cards, regardless
of the issuing bank. From a consumer’s
perspective, they would need to know
that their card is accepted everywhere,
even when transacting across borders.
Given how pervasive the scheme is, all
banks want to be part of the network,
so that they can easily settle transactions
with other banks across the globe. In
our opinion, this strong network effect is
a significant moat that any noteworthy
entrant into the electronic payments
industry will have to overcome if they are
to compete with the incumbents. Visa’s
partnerships with PayPal, Apple Pay,
Swatch and Android Pay corroborate
our view that it is much easier for new
technologies to leverage off Visa’s network
rather than circumvent it.
KEY RISKS
Despite the decidedly favourable theme,
it would be remiss of us to ignore
the inherent risks of our large holding
in Visa. Chief amongst our concerns
are the litigation and regulatory risks
that payment networks and companies
within the financial sector contend with.
Like many dominant businesses, Visa
attracts the scrutiny of regulators. Our
expectation is that adverse changes to
regulation in different geographies will
continue to act as a ceiling on Visa’s
pricing for the usage of its network. An
additional risk that payment networks are
exposed to is the threat of new entrants.
A marvel within the technology sector
is how quickly businesses emerge and
dominate, but also how quickly they
can shrink due to new trends. Our view
regarding new technologies within the
electronic payments industry is that they
present both risks and opportunities for
Visa. We have seen new entrants like
Apple and Android enter the payment
"ABOUT 50% OF ALL THE CREDIT CARDS AROUND THE WORLD ARE VISA-
BRANDED. FURTHERMORE, AROUND 70% OF ALL
GLOBAL DEBIT CARDS ARE VISAS."
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space by partnering with Visa and
Mastercard. On the other hand, the
advent of mobile money has sidestepped
the banking and payment network sectors.
However, on the whole, we believe
that Visa’s trusted brand and extensive
global network afford the group time to
adapt to new technological changes
by partnering with the new entrants or
acquiring them. Regarding pricing and
regulation, we believe that the growth
in electronic payments at the expense
of cash usage will outweigh the pricing
pressure from merchants and regulators
over the coming years, although it is a
dynamic worth watching closely.
SOLID FUNDAMENTALS
Payment network operators are highly
profitable businesses. Revenue growth is
driven by strong tailwinds of increased
numbers and volumes of transactions.
Outside of staff costs, marketing is Visa’s
single largest operating expense. Over
decades, the group has spent billions
of dollars to build its brand. Owing to
high operating leverage, Visa’s margins
compare favourably to related peers.
Chart 4 highlights the consistency of
Visa’s high margins, barring the distortions
from one-off litigation expenses and the
recent Visa Europe acquisition.
Visa is highly cash generative, it
consistently converts all of its accounting
profits into cash. The group’s high free
cash flow has afforded it the ability to
return most of its profits to shareholders.
In fact, in 2013 and 2014, the
group returned all of its net income to
shareholders through share buybacks
and dividends. Group debt to equity
for the 2016 fiscal year rose to 58%,
as a result of the debt-funded acquisition
of Visa Europe. Prior to the acquisition,
Visa’s balance sheet was debt free, a
clear indication of a solid balance sheet.
THE QUINTESSENTIAL QUALITY
COMPANY
Despite the regulatory concerns alluded
to, we believe that Visa presents one
of the most cogent investment themes
in our global universe. A key attribute
supporting this view is the secular shift
towards electronic payments, which is
evidenced by the consistent growth in
electronic transactions and volumes. In
many respects, Visa is the quintessential
quality company – it is the market
leader in a growing sector, has strong
fundamentals and has a deep moat in
the form of a strong brand and benefits
from the network effect. This, together
with management’s good record of
capital allocation, give us conviction
to retain Visa as the largest holding in
our Global Equity Model Portfolio.
CHART 4: LAST REPORTED FY OPERATING MARGINS CHART 5: VISA’S STABLE OPERATING AND NET MARGINS
Source: Thompson Reuters Source: Thompson Reuters
52.3% 52.5%
15.8%
23.8%
41.3%
25.1%28.3%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Visa Inc.
Mastercard Inc.
PayPal Inc.
American Express
Discovery Financial Services
Capital One Financial
Synchrony Financial
52.3% 52.5%
15.8%
23.8%
41.3%
25.1%28.3%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Visa Inc.
Mastercard Inc.
PayPal Inc.
American Express
Discover Financial Services
Capital One Financial
Synchrony Financial
0%
10%
20%
30%
40%
50%
60%
70%
80%
Mar
-13
Sep-
13
Mar
-14
Sep-
14
Mar
-15
Sep-
15
Mar
-16
Sep-
16
Operating Margin Net Margin
VISA – CASHING IN ON A CASHLESS SOCIETY
15
16
DIFFERENTIATED MODELVarious retail models exist around the
world. Among these are chain, franchise
and independent retailers. Each operating
model has its pros and cons. Spar Southern
Africa largely employs the independent
retail model, where each store is owned
by an entrepreneur who essentially partners
with Spar (the wholesaler) to the mutual
benefit of both parties. Spar Group,
in effect, acts as a warehousing and
distribution business that serves retailers
under its brands. Importantly, there is a
voluntary trading arrangement between
the individual stores and the group,
which means that there is no obligation
for any of the independent retailers to
source from the group. Yet, despite this
provision, about 90% of the goods in
the Southern African stores are sourced
from the group. We believe that this high
percentage is a strong indication that
the model works. A key attraction of the
model is the complement of entrepreneurial
drive and flair at store level coupled with
the support from a wholesaler with scale
SPAR GOOD FOR YOU
VICTOR MUPUNGA – RESEARCH ANALYST
Spar barely needs an introduction. The group has been operating in South Africa for over 50 years and globally since 1932.
Since obtaining the right to use the Spar brand in Southern Africa in the early 1960s while servicing about 500 small retailers, the
business has grown and now operates six Spar distribution centres and one Build It centre in the country. Recent forays into Ireland,
England and Switzerland complement the local operation and present a compelling investment.
Our investment case for Spar centres around three core attributes that we believe differentiate the retailer from its peers: the business’
attractive operating model, its global diversification and its favourable financial metrics.
and a recognisable brand. The tough operating environment that South African retailers have faced over the past few years has further put this model to the test. Some independents have struggled and received assistance from the wholesaler, which allowed them to survive. Some store owners could not keep their doors open, in turn allowing Spar to purchase distressed stores with the expectation that when the market turns, new entrepreneurs will be able to repurchase those stores from Spar, which lets the group retain key locations. We favour this long-term thinking by the group.
The independent retail model is also appealing in that it easily allows for diverse store formats. The success of this is evidenced by Spar Southern Africa trading under nine different store formats, ranging from the large layout SuperSpar to the smaller Spar Express and Tops. Each brand and store is unique, tailored to its specific location and consumer preferences, culminating in a well-balanced portfolio. The group currently services over 2 000 Southern African stores providing them with groceries, fresh produce, liquor, pharmaceuticals and building materials across the LSM spectrum.
51%33% 25% 22%
40%
33%
44%51% 53%
45%
16% 23% 23% 25%15%
0%
20%
40%
60%
80%
100%
2004 2009 2011 2014 2016LSM 1-4 LSM 5-7 LSM 8-70
Source: Macquarie Research
CHART 1: SPAR'S EXPOSURE ACROSS THE LSM SPECTRUM
17
SCALE & BARGAINING POWER
As a diverse warehousing and distribution
business, Spar’s key performance driver
centres around its ability to use its trading
power to competitively price the products
that it warehouses and distributes to its
retailers. Scale is vital in this quest. The
footprint of its retailers is the largest in the
country, nearly twice as many stores as the
closest competitor. The group sources from
more than 5 000 suppliers, once again
benefiting from bulk procurement. The scale
of the group’s operations enables them to
negotiate drop shipments, i.e. suppliers
delivering directly to stores instead of
via the warehouse. This represents about
30% of turnover and allows the group to
streamline logistics. To give context, Spar’s
trucks travelled in excess of 31 million
kilometres during the 2016 financial year.
GLOBAL DIVERSIFICATION
In 2014, Spar Southern Africa launched its
global strategy with an acquisition of the
BWG Group (Spar Ireland and South West
England). Subsequent to that purchase,
the group has added ADM Londis, Gillett
and Spar Switzerland. We estimate
that the foray into these three European
countries will result in Spar generating
about 40% of its 2017 revenue outside
Southern Africa. Apart from the obvious
benefits of currency diversification, the
dynamics in the European food retail
market are notably different to South Africa.
For example, the Irish retail landscape
is dominated by small owner-managed
shops, convenience or forecourt stores, as
we refer to them. Spar Ireland is estimated
to have about 40% market share in the
Irish convenience market and between
15% and 18% of the total Irish food
market. Similar to Southern Africa, Spar
Ireland operates distribution centres, which
service six varied grocery brands (1 340
stores in total). Over the last few years,
the Irish economy has been recovering
from the devastating effects of the financial
crisis. Spar’s entry into Ireland was at an
opportune time, and we expect the Irish
business to continue to recover along with
the rest of the economy. We anticipate
that the benefits of cross-learning from the
variegated geographies that the group
operates in, coupled with increased focus
on supplying perishables, will aid in the
group’s quest to grow the Irish business.
Chart 2 shows the growth across various
retail channels in Europe. Convenience
and forecourt formats are expected to
grow well ahead of competing formats at
5.3% per annum over the next three years.
Spar Switzerland adds a different mix to
the group. The Swiss business services
301 stores across three brands and
11 cash and carry outlets. The business
owns 53 of the 301 stores and expects
to reduce this over time, as the group
focuses on distribution and warehousing.
The Swiss retail market is highly competitive
and contends with a macro backdrop
of deflation, stable salaries and private
consumption that is growing just below 1%.
Naturally, this is a challenging environment
for retailers. Yet, we are confident that in
time, this will turn out to be another well-
timed acquisition. Plans are underway to
grow the Swiss business’ retail offering
(increasing product depth), improve and
increase the number of stores. This will
go some way to increasing the group’s
market share in Switzerland from the
current 3% and into improving operating
margins. Chart 3 shows the divergent
grocery spending power across European
countries. Switzerland, England and
Ireland rank highly on spend per capita,
highlighting the attraction in the European
markets Spar operates in.
CHART 2: TOTAL EUROPEAN FOOD RETAIL SALES PER CHANNEL (2008 – 2018F)
CHART 3: GROCERY SPEND PER CAPITA
Source: Planet Retail Source: Planet Retail
0
50
100
150
200
250
300
350
400
Hyp
erm
arke
ts &
Supe
rsto
res
Supe
rmar
ket &
N
eigh
bour
hood
Disc
ount
Con
veni
ence
&
Fore
cour
t
Dru
gsto
res
Cas
h &
Car
ries
Sale
s (€
bn)
20082013
2013 - 2018 CAGR
2008 - 2013 CAGR2018f
1.6%
2.0%
2.6%
2.6%
4.5%
4.2%
2.8%
5.3%
0.1%
4.4%
0.1%
1.8%
0
50
100
150
200
250
300
350
400
Hyp
erm
arke
ts &
Supe
rsto
res
Supe
rmar
ket &
N
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Disc
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Con
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ence
&
Fore
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t
Dru
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res
Cas
h &
Car
ries
€ '0
00
2008 2013
2013 - 2018 CAGR2008 - 2013 CAGR
2018f
1.6%
2.0%
2.6%
2.6%
4.5%
4.2%
2.8%
5.3%
0.1%
4.4%
0.1%
1.8%
5.3
3.83.7
3.53.43.33.22.82.6
2.5
2.52.42.1
2.11.91.8
1.81.61.61.51.51.51.41.41.31.11.11.00.90.80.80.60.50.30.30.20.20.2
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Nor
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18
CHART 4: SPAR'S RETURN ON CAPITAL EMPLOYED VS PEERS (LAST REPORTED FY)
CHART 5: SPAR’S CAPEX SPEND RELATIVE TO PEERS
Source: Company reports Source: Company reports
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Nor
way
Switz
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Den
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Cyp
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4.2
3.6
31%
28%
21% 20%
0%
5%
10%
15%
20%
25%
30%
35%
Spar Pick n Pay Massmart Shoprite
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Nor
way
Switz
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land
Den
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€'00
0
5.0
4.2
3.6
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Rm
Shoprite Pick n Pay Spar
We expect Spar to continue to look
for acquisitions outside of its existing
markets. The group is in the early stages of
expanding into Zambia, and has formed a
joint venture with plans to enter Sri Lanka.
While we do not expect Zambia and
Sri Lanka to be material in the short to
medium term, we believe that management
will continue to look for additional
opportunities, further strengthening the
group’s appeal as a well-diversified retailer.
FAVOURABLE FINANCIAL
METRICS
One market feature that has stood out in
the low growth environment experienced
post the financial crisis, has been that
companies that generate high free cash
flows are highly rated. The reasons are
intuitive. When economic growth is low,
companies that are not capital intensive
can return more cash to shareholders,
are more defensive and have stronger
balance sheets that can fund acquisitions.
We believe that Spar fits this bill. Net
debt to EBITDA as at September 2016
was 1.5x and interest cover was 24x.
This is despite the distortions of the recent
acquisitions that were only included for
part of the financial year.
Unlike its local peers, Spar’s wholesale
and distribution model has resulted in Spar
reinvesting significantly less capital while
maintaining an attractive 66% payout ratio
over the years. For the capital that the
group has employed, it has generated
returns that exceed those of its peers. This,
in our opinion, underscores the quality of
Spar. Charts 4 and 5 show Spar’s low
capex profile and the return on capital
employed relative to peers.
THE BOTTOM LINEWe regard Spar to be a well-managed, diversified food retailer. The business’
earnings tend to be defensive in tough times, it generates strong cash flows, and
can augment organic growth with acquisitions. The benefits of scale serve as
a moat against competitors and recent acquisitions provide broader diversity.
With the share trading at an undemanding forward earnings multiple of
15.5 times, in line with its historic average, we believe that this quality company
will contribute significantly to our clients’ portfolios.
SPAR GOOD FOR YOU
19
20
The fall-out from the axing of former Finance
Minister Nhanhla Nene in December
2015 and the very public animosity
between the Directorate for Priority Crime
Investigation (the so-called “Hawks”) and
the executive leadership at National
Treasury continues to reverberate through
society, especially via policy uncertainty.
Recently, this has been exacerbated by
the President’s refusal to sign the Financial
Intelligence Centre (FIC) Amendment Bill
into law. The Bill has been drafted by
National Treasury in accordance with
the recommendations of the Financial
Action Task Force – an intergovernmental
body developing and promoting policies
to combat money laundering and terror
financing. The current stalemate could
have dire consequences for South Africa’s
financial sector due to global concerns over
the country’s money-laundering controls.
THE ECONOMY IN 2017 – IN SEARCH OF SILVER LININGSDR ROELOF BOTHA – ECONOMIC ADVISOR TO PwC
DUBIOUS ENERGY POLICY
One of the most notable aspects of
compromised public policy in South
Africa is in the energy sector, with much
of the spat between the two camps in
Government emanating from the apparent
intention to pursue a nuclear power deal
with a Russian firm that is simply not
affordable from both a fiscal and an
economic perspective. Numerous energy
experts have warned that the Department
of Energy (DoE)'s Integrated Energy Plan
overstates the costs of renewables and
gas as future sources of electricity.
Representatives from institutions such as
the Council for Scientific and Industrial
Research, the Energy Intensive User
Group, the South African Renewable
Energy Council and the South African
Independent Power Producers’ Association
have also raised concerns over the
limitations on renewables set by the DoE.
Combined with lethargic economic
growth, higher inflation, rising interest
rates and rising public debt, it is no
surprise that the international ratings
agencies were making threatening
noises and that the rand exchange
rate fluctuated significantly. The key
reasons for the ups and downs of the
rand provide a nutshell overview of
the trials and tribulations experienced
by the country during the past year, as
depicted by Table 1 on the next page.
Although some of the problems faced by
the South African economy during 2016
were home-grown, much of the lethargy
in output was caused by the lingering
effects of a five-year commodity slump,
which played a key role in forcing two
BRICS partners (Brazil and Russia) into
recession.
To describe 2016 as a tumultuous year in South Africa’s modern history is probably an understatement.
On the political front, it became clear that the ruling party was experiencing mounting friction between two opposing groups.
One group seems to have been compromised by evidence of state capture and ongoing tender irregularities, while the other is
committed to combating corruption and improving corporate governance standards in the public sector at large.
21
DEFLATION STIFLING RECOVERYThe search for possible causes of what
may be termed a form of near-global
secular stagnation reveals a common
denominator, namely deflation, which
can be defined as a decline in asset and
consumer prices. Deflation results from a
lengthy period of insufficient demand,
during which unemployment rises, economic
growth is lethargic and recessionary fears
are widespread. Two of the obvious
responses of the business community are
lower production and increased price
competition, which aggravates deflation.
Once a critical mass of consumers and
investors expect prices to decline in future,
purchases of non-essential goods are
deferred, leading to even lower demand
and, ultimately, a downward spiral of
demand and production.
In most of the world’s post-industrial
economies, the policy response since
the 2008 Global Financial Crisis has
been rather predictable: with fiscal deficits
increasing, the burden for much-needed
economic stimulation fell squarely on
monetary policy, with fairly aggressive
accommodation by central banks leading
to record low interest rates in most high-
income countries and, as an inference,
every prospect of a meaningful recovery.
It was a false dawn, however, with the
initial recovery in most commodity prices
having petered out again during the last
quarter of 2016.
The villain of the piece was lurking in an
unintended consequence – cheap money
made it possible for large companies
to continue expanding their production
capacity, especially in capital-intensive
industries, thwarting the narrowing of the
gap between demand and supply.
Fortunately, the International Monetary
Fund is cautiously optimistic that several
key regions and countries will gain some
economic momentum in 2017, including
sub-Saharan Africa, with India leading
the way among the top 10 economies.
RAND RESILIENCEApart from the unprecedented degree of
volatility in the rand/US dollar exchange
rate, the other key observation is that
the rand is slowly but surely clawing its
way back from a grossly undervalued
position. Between mid-January and early
December, the rand has been one of the
world’s best-performing currencies, gaining
an impressive 21% against the world’s
dominant currency, the US dollar.
Since the end of 2015, the rand has been exposed to various economic and political influences, leading to unprecedented
volatility against the US dollar.
DATE MAJOR REASON FOR DEPRECIATION OR STRENGTHENING
% CHANGE FROM PREVIOUS DATE
DECLINE INCREASE
13-Dec 15 Nene dismissal -9.6
17-Dec 16 Appointment of Mr Pravin Gordhan as Minister of Finance 6.1
07- Jan 16 Reaction to the downgrade of SA's largest banks by Moody's -5.0
16-Jan 16 Concerns over China's economy -6.0
25-Feb 16 Minister Gordhan's Budget Speech 8.9
29-Feb 16 Conflict between the Hawks/Moyane & Minister Gordhan -4.7
04-Apr 16 US Federal Reserve decides to maintain low interest rate policy 10.0
22-Apr 16 Positive Chinese trade data 2.9
20-May 16 US economy gains momentum -10.2
24-Jun 16 Brexit (pound sterling takes a hammering) 9.4
28-Jun 16 Post-Brexit fears and stronger economic data from the US -5.1
08-Jul 16 Gold price at a three-year high and large monthly trade surplus for SA 3.2
12-Aug 16 Municipal election results and another large SA trade surplus 11.1
02-Sep 16 Conflict between the Hawks and Minister Gordhan intensifies -9.2
22-Sep 16 Rise in China's iron ore imports 8.4
12-Oct 16 Minister Gordhan charged with fraud charges -5.5
02-Nov 16 Fraud charges against Gordhan dropped and strong SA trade data 6.4
18-Nov 16 Stronger US dollar/fears over SA credit rating downgrade/gold slides -6.9
05-Dec 16 Investment grade status for SA sovereign bonds retained 4.9
Total % change between 16 January and mid-December 2016 21.6
TABLE 1: FLUCTUATIONS IN THE RAND
Sources: Oanda; own research
22
The role of the gold price recovery in the
gradual strengthening of the rand since
the beginning of 2016 should not be
under-estimated. As a rule of thumb, for
more than half a century, the higher the
dollar gold price, the stronger the rand
becomes, and vice versa. Therefore,
any further improvement in 2017 in the
demand for precious metals, especially
gold, will almost certainly assist the rand
in gradually eliminating its undervalued
status, while also benefiting the economy
as a whole.
A more stable and modestly stronger
currency is certainly on the cards in 2017,
on condition that the domestic political
situation remains calm and that National
Treasury is allowed to pursue pragmatic
measures to combat corruption with the
awarding of tenders by Government and
state-owned enterprises.
Further rand resilience, combined with a
recovery in agricultural output, should lead
to substantially lower inflation in 2017,
with every prospect of a return to more
accommodating monetary policy.
THE ECONOMY IN 2017 IN SEARCH OF SILVER LININGS
CHART 1: IMF GDP GROWTH FORECASTS CHART 2: GOLD PRICE
Source: IMF Source: World Bank
52.3% 52.5%
15.8%
23.8%
41.3%
25.1%28.3%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Visa Inc.
Mastercard Inc.
PayPal Inc.
American Express
Discover Financial Services
Capital One Financial
Synchrony Financial
-1.5
0.0
1.5
3.0
4.5
6.0
7.5
Russia US Sub-Saharan Africa
China India
2016
2017
-1.5
0.0
1.5
3.0
4.5
6.0
7.5
Russia US Sub-Saharan Africa
China India
2016
2017
1 050
1 100
1 150
1 200
1 250
1 300
1 350 US$ per oz.
Jan-
15Fe
b-15
M
ar-1
5A
pr-1
5M
ay-1
5Ju
n-15
Jul-1
5A
ug-1
5Se
p-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16Fe
b-16
Mar
-16
Apr
-16
May
-16
Jun-
16Ju
l-16
Aug
-16
Sep-
16O
ct-1
6N
ov-1
6D
ec-1
6
GROWTH DRIVERS During 2016, growth in private sector credit
extension was zero in real terms, and this
needs to be lifted urgently for economic
growth and employment creation to gain
momentum. Other potential growth drivers
include the strong showing of the volume
of mining output towards the latter part of
2016, as well as a return to job creation
in the formal sectors of the economy in the
third quarter of 2016. Furthermore, the
country’s leading business cycle indicators
have both recovered by more than 3% from
their earlier lows, while real retail sales
growth continues to remain in positive
territory.
Now that all three of the leading ratings
agencies have re-affirmed the investment
grade status of South Africa’s sovereign
bonds and a partnership approach towards
job creation is developing between
the public and private sectors, 2017’s
economic performance may surprise on
the upside.
ABOUT THE WRITERDr Roelof Botha has a diversified and distinguished career in management accounting, financial journalism, lecturing, consulting and economic research. He is a regular commentator and columnist on topical macroeconomic and socio-political issues and has authored more than 500 articles, books and research publications. In 2005, Dr Botha received the prestigious Finmedia Economist of the Year award, based on the accuracy of forecasts of key economic indicators. He remains involved with macroeconomic research and is a Senior Adjunct Faculty member of the Gordon Institute of Business Science (GIBS). Over the past three decades, more than 400 companies and employer organisations have utilised his services in providing forecasts of economic indicators, mostly for purposes of strategic planning. As a seasoned veteran of the public speaking circuit in Southern Africa, Dr Botha has managed to captivate audiences with his unique style of blending the serious matters of economics and politics with the lighter side of life. His presentations are regarded as broadly motivational, in terms of highlighting research that confirms numerous positive structural changes in the Southern African economy.
23
24
CANADA
TABLE 1 QUALITY OF LIFE
SWEDEN
SWEDEN
SAUDI ARABIA
DENMARK
AUSTRALIA
NETHERLANDS FRANCE
GERMANY SWEDEN
AUSTRIA JAPAN
UNITED KINGDOM
LUXEMBOURG
SOUTH AFRICA
1
2
8
10
9
4
5 5
7 7
8 8
9
10
49
DENMARK3
DENMARK6NEW ZEALAND6
NEW ZEALAND8
CANADA2
CANADA5 CANADA5
TABLE 2 EDUCATION
UNITED KINGDOM1
CANADA3
SWEDEN1
TABLE 3 RAISING KIDS
DENMARK2
AUSTRALIA
AUSTRALIA
5
6
NETHERLANDS
NETHERLANDS
4
10
SOUTH AFRICASOUTH AFRICA 4328
LUXEMBOURG10
UNITED KINGDOM9
AUSTRIA7
IRELAND8
NEW ZEALAND6
SWEDEN1
TABLE 4 GREEN LIVING
NETHERLANDS4
SOUTH AFRICA27
UNITED KINGDOM9
UNITED KINGDOM4
CHINA1
TABLE 5 CAREERS
AUSTRALIA7
SOUTH AFRICA23
SOUTH KOREA
RUSSIA
7
9
UNITED STATES3
UNITED STATES10
UNITED STATES3
GERMANY4
GERMANY3
GERMANY2JAPAN2
JAPAN6
THE QUALITY OF LIFEINSIGHTS INTO THE RANKINGS OF COUNTRIES WITH THE BEST QUALITY OF LIFE
What does quality of life mean to people? For some, it may mean material wealth or access to the best education and healthcare,
while for others it may be job security and political stability. US News & World Report, together with BAV Consulting and the
Wharton School of Business at the University of Pennsylvania, created the Best Countries rankings report in 2016 to identify how
countries are perceived on a global scale.
HOW QUALITY OF LIFE WAS MEASUREDQuality of life not only focuses on a
country’s social support structures such
as public health and safety, but also on
the opportunities that are available to
people, such as education, employment
and economic security. These are typically
the factors that influence where people
want to live, pursue career opportunities,
or raise a family.
To determine quality of life, these were
considered:
• A good job market
• Affordability
• Economic stability• Family-friendliness• Income equality• Political stability• Safety• Well-developed public education system• Well-developed public health system
TABLE 1: TOP 10 COUNTRIES FOR QUALITY OF LIFE Canada was rated as the best country for quality of life and was a consistent top achiever in almost all the factors considered. European countries also scored relatively well, with two Scandinavian countries coming in second and third. Out of the
African countries included in the survey,
Tunisia was the highest-placed, at 47th.
HOW SOME OF THE QUALITY
OF LIFE DIMENSIONS SCORED
INDIVIDUALLY
EDUCATION
The scores were based on three equally
weighted country attributes:
• Top quality universities
• A well-developed public education
system
• Consideration for attending a university
in that country
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TABLE 2: THE BEST COUNTRIES FOR
EDUCATION
Most of these countries place an important
emphasis on government spending for
education. For example, Denmark,
Norway, Sweden and Finland spend
most of their money on education as a
percentage of their GDP. Some countries,
like Canada, offer free primary and
secondary education while Denmark offers
free higher education. The results also
showed that the lower performing countries
have lower literacy and enrolment rates.
According to www.educationuk.org,
the strength lies in their world-class
colleges and universities.
• Four of the world’s top eight universities are in the UK.
• The UK ranks in the top five in the world for university-industry collaboration.
• Student satisfaction in the UK is higher than ever, with 86% of students satisfied with their course, and the region has the lowest drop-out rate in Europe.
• 93% of UK postgraduate students rated the quality of teaching positively.
• International undergraduate
satisfaction in the UK is very high,
at 91%. 85% of international
undergraduates would recommend
their UK study experience, higher
than any major English-speaking
study destinations.
• The UK is also a world-leading
research nation – 54% of the research
conducted by UK universities and
colleges is classed as ‘world-leading’
and the region ranks second in the
world for the quality of its scientific
and research institutions. In fact, UK
universities and research institutions
have produced 107 Nobel Prize
winners. Furthermore, researchers
in the UK gain more citations and
produce more articles than anywhere
else in the world.
MOST FAMILY-FRIENDLY
COUNTRIES
TABLE 3: BEST COUNTRIES TO RAISE
CHILDREN
Sweden tops the list as the best country
to raise children and has several policies
and practices that provide support for
young families. In addition, this support
is not limited to just mothers, but also
extends to fathers.
SPECIAL CARE FOR EXPECTANT
MOTHERS
Before a baby is born, expectant mothers
get prenatal care through free or subsidised
courses that help them prepare for the
delivery.
LONG, PAID PARENTAL LEAVE
Parents are entitled to 480 days of paid
parental leave when a child is born or
adopted. For 390 of the days, parents
are entitled to nearly 80% of their normal
pay, with the remaining 90 days paid
at a flat rate. Those who are not in
employment are also entitled to paid
parental leave. Parental leave can be
taken up until a child turns eight and the
leave entitlement applies to each child,
so parents can accumulate leave from
several children.
A STRONG FOCUS ON GENDER
EQUALITY
In Sweden’s efforts to achieve gender
equality, each parent is entitled to 240
of the 480 days of paid parental leave.
Each parent has two months reserved
exclusively for him or her. Men in Sweden
currently take nearly a quarter of all
parental leave – a figure the government
hopes to improve by providing a gender
equality bonus in the form of an extra
daily payment if 270 days of the paid
parental leave are divided evenly between
mother and father.
MONTHLY ALLOWANCE FOR
CHILDREN
Aside from paid leave, the government
provides an additional monthly child
allowance until a child reaches the age
of 16. Those with more than one child
receive an extra family supplement, which increases further with each additional child.
WHAT MAKES SWEDEN SO
FAMILY-FRIENDLY?
WHY IS THE UK’S EDUCATION
SECTOR SO HIGHLY RATED?
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THE QUALITY OF LIFE
FREE SCHOOLINGSchool for children aged 6 to 19 is free of charge, with free lunches. The free education continues into university for students from the EU.
HEALTHCARE IS NEARLY FREEHealthcare (including dental care) is essentially free until the age of 20. Infants get free Vitamin D drops until the age of two – important in Sweden’s cold climate.
FREE PUBLIC BUS RIDES WITH PRAMSIn some Swedish cities, parents pushing infants and toddlers in prams and pushchairs can ride for free on public buses.
STAYING HOME WITH SICK CHILDRENMost Swedish companies are flexible regarding parental duties, and employees still get 80% of their pay when they have to stay home with sick children or dependents. This temporary parental leave is available for up to 120 days per child per year for children under 12 years. Children aged 12–15 require a doctor’s certificate. Parents whose children are sick or disabled for more than six months can also receive an additional allowance until the child turns 19.Source: www.sweden.se
BEST COUNTRIES FOR GREEN LIVINGThe scores are based on a compilation of three attributes:• How much the country cares about
the environment• Whether the country is health
conscious • Innovation
TABLE 4: BEST COUNTRIES FOR GREEN
LIVING
Sweden was seen by respondents as
the best country to offer its citizens a
“green” lifestyle. The country has become synonymous with sustainable development.
Many initiatives have been undertaken, with the Swedish government increasingly pushing for more to be done, with funding being allocated to deliver on an environmental technology strategy that helps to grow and develop environmental technology companies.
According to www.sweden.se, Sweden ranks as the top nation with regard to the purchase of organic food. Sweden is also leading the way with the creation of sustainable cities for the future, as well as sustainable transportation.
TABLE 5: BEST COUNTRIES TO START A CAREERAccording to the World Bank, the global labour force has grown by more than 200 million people in the last five years, most of whom are millennials (adults younger than 35 years).
The rankings were based on scores from nearly 6 000 millennials on a compilation of seven equally weighted country attributes:• A good job market• Economic stability• Entrepreneurial ability• Income equality• Innovation• A good place to reside
• Progressiveness
Most respondents felt that China was an
excellent place for start-up companies to
thrive given its low barriers to entry. From
an entrepreneurial view, China scored
well based on attributes such as access to
capital, infrastructure and tech expertise.
Innovation also plays an important role
here, as China is seen as a country that
has a platform for young people to unleash
their creativity.
Weighted % to Overall Best
Country Score
Sub-
rankings
Citizenship 16.95%Cultural influence 12.93%Entrepreneurship 17.42%Quality of life 16.89%Power 7.42%Heritage 3.17%Open for business 11.99%Movers 10.00%Adventures 3.24%
HOW SOUTH AFRICA FARED OVERALLOVERALL RANKING CATEGORY SCORE RANKING
#31Adventure 3.5 #25
Citizenship 1.1 #26
Cultural Influence 1.4 #34
Entrepreneurship 1.8 #25
OVERALL SCORE Heritage 2.4 #31
Movers 7.4 #9
Open for Business 2.7 #55
Power 1.0 #27
Quality of Life 0.5 #49
2.3
ABOUT THE REPORTThe Best Countries report was released in 2016 and ranks 60 countries across a number of categories and sub-rankings.
About 16 200 key influencers, business leaders and citizens from 36 countries in Asia, America, Middle East, Africa
and Europe were surveyed.
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CONTACT US
DEREK ALTONTel: 021 524 4566Cell: 072 290 4220derek.alton@omwealth.co.za
SHANE LAWRENCETel: 021 524 4656 Cell: 079 526 6369shane.lawrence@omwealth.co.za
PAUL STEVENTel: 021 524 4572Cell: 076 719 3958paul.steven@omwealth.co.za
JOHANN VAN ZYLTel: 021 524 4574Cell: 083 261 0140johann.vanzyl@omwealth.co.za
CAPE TOWN
DEAN GINSBERGTel: 011 245 3818Cell: 083 650 8223dean.ginsberg@omwealth.co.za
TREVOR O’CALLAGHANTel: 011 245 3801Cell: 083 660 8321trevor.ocallaghan@omwealth.co.za
MIKE SITHOLETel: 011 245 3741Cell: 083 352 9070mike.sithole@omwealth.co.za
GARY SMITHTel: 011 245 3802Cell: 082 464 3691gary.smith@omwealth.co.za
FRANCOIS STRYDOMTel: 011 245 3806Cell: 082 442 3777francois.strydom@omwealth.co.za
JOHANNESBURG
LOUIS FOURIETel: 012 369 7232Cell: 083 391 8610louis.fourie@omwealth.co.za
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JACQUES THERON Tel: 012 369 7235Cell: 082 495 6465jacques.theron@omwealth.co.za
PRETORIA
HELMAR BREYTENBACHTel: 031 581 0773Cell: 082 564 0223helmar.breytenbach@omwealth.co.za
BRADLEY REEDTel: 031 581 0699Cell: 063 454 0333bradley.reed@omwealth.co.za
BRIAN VERMEULENCell: 083 408 0528brian.vermeulen@omwealth.co.za
DURBAN BLOEMFONTEIN
PRIVATE CLIENT PORTFOLIO MANAGERS
CHRIS POTGIETERHead of PCSTel: 021 524 4582Cell: 082 827 9777chris.potgieter@omwealth.co.za
SAMEER SINGHResearch AnalystTel: 021 524 4529Cell: 072 383 4490sameer.singh@omwealth.co.za
VICTOR MUPUNGAResearch AnalystTel: 021 524 4466Cell: 072 838 2919victor.mupunga@omwealth.co.za
MOOSA HASSIMInvestment Analyst Tel: 021 524 4609Cell: 072 448 6369moosa.hassim@omwealth.co.za
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